What you need to know about BREXIT

In the last few days, all the media, financial experts, politicians and basically everyone who has heard the word Brexit is asking and trying to understand what is this about? Well that is exactly what I’ll explain next and how does it affect the U.K., Europe and the rest of the world, including Mexico.

Everything you need to know about Brexit

In the last few days, all the media, financial experts, politicians and basically everyone who has heard the word Brexit is asking and trying to understand what is this about? Well that is exactly what I’ll explain next and how does it affect the U.K., Europe and the rest of the world, including Mexico.

The United Kingdom held a referendum last week to vote on whether the U.K. should stay in or leave the European Union.

This was not the first such referendum in the UK. In 1975, just two years after joining the then EEC, voters went to the polls in a referendum on continued membership; 67% of the electorate voted then to remain in the EEC.

As the EEC became the EC and then the EU, it stoked fears about an erosion of British sovereignty.

Membership is an issue that has particularly vexed the UK´s Conservative Party, with many party members deeply sceptical of the EU’s increasing powers.

Disagreement and division eventually led to a declaration in September 2013 from David Cameron: “We will give the British people a referendum with a very simple ´In´ or ´Out´ choice”.

British Prime Minister David Cameron led the campaign to stay in the EU, while former mayor of London Boris Johnson was the main protagonist in the leave camp.

British Labour Party leader Jeremy Corbyn, has been accused by many in his party of showing only lukewarm support for the Remain side, but said “a vote to stay in was in the best interests of the UK people”.

UK Independence Party leader Nigel Farage said: “This is a once in a lifetime opportunity to get back the independence and self-government of this nation.”

What Happened?

After the stunning result last Thursday, the U.K. voted to leave the European Union (51.9%-48.1%) all eyes are on what’s next.

As the saying goes,” A week is a long time in politics”. The British Prime Minister David Cameron announced his resignation the following morning in the wake of the final result. This is the first time a country has voted to leave the European Union since Greenland in 1982 and experts aren’t exactly sure what the outcome of this will be. Any real effect that comes from the Brexit will likely take at least several months to materialize.

Politically speaking the UK government and shadow opposition are in disarray with several ministers having already resigned following the Brexit and future leadership will have to deal with healing a society left deeply divided by the bitterness that characterized the UK´s Remain/Leave campaign.

Economically speaking, as the result of the vote became apparent, the British pound fell to levels that haven’t been seen since 1985, and overseas equities markets plummeted. The following morning the FTSE 250 fell by as much as 12.3% before paring losses back to 7.3% by the close.

Most notably, Japan’s Nikkei 225 fell 5.65%; its worst day in five years as concerns mounted that the Brexit will lead to a new recession in key end markets.

Why did it Happen?

There are 3 main reasons why UK citizens voted to leave the EU:

Immigration

The huge influx of people from Europe over the last 10 years has changed the cultural dynamic of the country. This can be viewed as either positive or negative depending on your perspective, but either way, this did happen and many people in Great Britain were not happy with this. A lot of people felt that there was a loss of British identity. Politicians ignored this to their peril.

The recent Syrian refugee crisis has not helped the situation, Europe’s borders are under threat constantly and the Channel Tunnel is a continued source of attempted illegal immigration. Open borders were an issue for Britain at the outset of the EU experiment and to a great extent the worries have proved correct.

Loss of British Identity & Independence

Britain had never really identified itself with Europe, it had its own Empire and the growing cultural and institutional impact of Europe did not sit well with the British people. Brussels was increasingly seen as an ivory tower which was bureaucratic and unaccountable. Britain wants its sovereignty back and to steer its own cultural path.

Millennials do not feel that they have benefited from the established political setup. The present setup was good for the baby boomer generation – They were able to get good middle class jobs with good pay and were able to buy a nice house, get a good pension and save money.

The new generation cannot afford housing, are moving from gig to gig and are the first generation after many years who are NOT guaranteed to be wealthier than their parents. These younger voters want change and do not share fears of socialism or any memory of a Europe in conflict which can only be kept together by political and economic union.

What next for the UK and its Economy?

London is likely to lose its revered position as the world’s leading financial centre as the Brexit means losing its privileged access to the EU, the world’s largest trading bloc. Major U.S. banks located in Britain have already begun preparing for the possibility that they will no longer be able to provide financial services to EU clients from their current geographic location.

Until now, banks around the world have been able to conduct business in the EU by setting up shop in the U.K., which has ‘passport’ privileges to the other 27 member nations. This is one of the primary reasons London has become not only the EU’s financial capital, but the world’s financial capital as well.

Once Article 50 is invoked, it sets a two-year deadline for trade and immigration negotiations to be struck. Once the two years is up the U.K. is no longer bound by the European Union treaties.

– A new British Prime Minister: Boris Johnson is the favourite to take over the role.

– The invoking of Article 50 of the Lisbon Treaty. In a speech after the referendum, Johnson said there was no hurry for the U.K. to invoke Article 50. “There is no need for haste,” Johnson said.

– Further noise from right-wing EU parties calling for referendums of their own.

What will happen to the European Union?

For the EU, the traumatic divorce from its second largest economic partner goes to the heart of Europe´s bold vision of integration and cohesion and impacts the largest trading bloc in the world.

On Monday 27th June, German Chancellor Angela Merkel met with Italian Prime Minister Matteo Renzi, the President of the European Council Donald Tusk and French President Francois Hollande in Berlin. These three are seen as the glue that will hold the EU together. Chancellor Merkel called the British vote to leave the EU as a “decisive point for Europe.”

In Europe, one of the biggest impacts that Brexit could lead to would be further exits from the E.U. Britain’s exit could possibly start a larger trend of defection, depending upon the economic consequences of this decision. Groups of nationalists in every country will be closely watching how this move unfolds in order to gain an idea of what might happen if they follow suit.

How will the Global Economy be affected?

Looking ahead continued upheaval in the international markets is likely. Some of Britain’s major trading partners, such as India and China are afraid that the split with the EU could lead to regulatory and economic upheaval that could hurt all three economies. And the financial community in the Far East is worried that a drop in the Pound could lead to a strengthening of the Yen, which would make exports more expensive for buyers.

And many companies in the U.S. and China that have previously traded heavily with Britain because of the access that the U.K. gave them to European channels may now see their profits drastically reduced as a result of this move. And the extended negotiations that will be required in order to facilitate Brexit may lead to a period of further instability in the markets.

How will the Brexit affect Mexico and how is Mexico responding?

The immediate reaction to the UK´s decision to leave the EU saw a sharp fall in the Mexican Peso. The Mexican Treasury Ministry and Mexico´s Central Bank have provided reassurances that Mexico has the necessary resources to defend the Peso from speculators. Following an analysis of inflation impact, it seems likely that the key interest rate will be adjusted upwards in the near term.

Whilst the Treasury Secretary downplayed the impact of the Brexit on Mexico given the relatively unessential trade flows between the two countries, (less than 1% of Mexican exports go to the UK and 2% of the Mexican FDI comes from the UK), it nonetheless seems likely that Mexico will be affected by the secondary effects of Brexit.

An uncertain global context can provoke a flight by investors from emerging markets to safe assets, weaker FDI inflows, and most significantly, the Brexit impact on the US, Mexico´s key trading partner is of greater concern. Such negative impacts could mean slower and scarcer inward investment flows dampening Mexico´s already lukewarm economic outlook.

What Mexico needs to do now is take advantage of the many international trade agreements it has in place to ensure Mexico´s prosperity. The conditions to diversify its trade and address its productivity lag need to be encouraged.

Post Brexit, Mexico needs to redouble its efforts to enhance its competitiveness, build its innovation and diversify in a meaningful way its trade and integration with the rest of the world.